Intellectual property law is good. Excess in intellectual property law is not. This blog is about excess in Canadian and international copyright law, trademarks law and patent law. I practice IP law with Macera & Jarzyna, LLP in Ottawa, Canada. I've also been in government and academe. My views are purely personal and don't necessarily reflect those of my firm or any of its clients. Nothing on this blog should be taken as legal advice.

Monday, May 01, 2017

Canada Won the Eli Lilly NAFTA ISDS Battle Bigly but Who Will Win the War?

As everyone knows by now, Canada supposedly “won” the Eli
Lilly NAFTA case. Prof. Richard Gold suggested in a tweet that there is an
analogy here to Vimy Ridge, which was recently and rightly on the mind of all
thinking and caring Canadians.

Indeed, just like Vimy, the Eli Lilly win was costly,
important and empowering. But just as WWI, which was supposed to be “the war to
end all wars” went on for a long time afterwards and WWII soon followed, the
Eli Lilly case was only a battleground victory and not the end of the Investor
State Dispute Resolution (“ISDS”) wars.

Moreover, unlike Vimy, it may not have been necessary or
even desirable for Canada to risk this Eli Lilly ISDS battle. However, we did
and we “won”. Let Canada celebrate this success but it is much too early to
declare victory in the ISDS wars. It may even be the case that this was a
“Pyrrhic Victory”, as the influential scholar Robert Howse suggests
and I discuss below.

It will be recalled that on May
13, 2013, a panel of the Supreme Court of Canada (“SCC”) with presiding Justice
Marshall Rothstein (now retired) held an extraordinarily rare and very patient oral hearing on whether
Eli Lilly should be allowed leave to appeal in a case involving the “promise
doctrine”. On May 16, 2013, the Court declined the leave application, as usual
without reasons. Here is the webcast of that hearing.

The astonishing and arguably
outrageous aspect of the Eli Lilly challenge was that it was frontally
challenging a decision of Canada’s highest court. That is something that no
Canadian litigant could possibly do – or would even think about. The only
recourse to a Canadian litigant that has been to the SCC and has lost or been
denied leave to appeal is to seek legislative change, which will rarely follow.
That is the basis of the rule of law, the independence of the judiciary, and the
sovereignty of this country.

Eli Lilly was not
challenging the conformity of the Canadian patent statute with international
law. If there were something substantively wrong with Canada’s Patent
Act that makes it non-compliant with international law, it could have been
challenged in a state to state procedure in the WTO. But that was not and is
not the case. Likewise, the Patent Cooperation Treaty has a state to state
dispute settlement provision involving recourse at the International Court of Justice.

So, Eli Lilly instead
basically sought to have a NAFTA panel of three arbitrators overrule the SCC,
which presumably saw no need to hear a case that challenged a long,
evolutionary and clear line of Canadian case law. Oh, and by the way, Eli Lilly
was now seeking damages in the amount of $500,000,000. A victory for Eli Lilly
would not only have been very expensive for Canadian taxpayers. It would have
set the stage for many further challenges to Canada’s judicial and political sovereignty
and exponentially increased the danger of regulatory and legislative chill.

Michael
Geist, who is not shy when it comes to critical comment on Canadian policy, quickly opined that:

The Tribunal decision
represents an enormous win
for the Canadian government and for the supremacy of Canadian law and the
judicial system more broadly. The real fears that dispute settlement
could be used to override Supreme Court of Canada decisions lies at the heart
of concern with ISDS provisions that have found their way into trade agreements
such as CETA and the TPP. (highlight added)

Richard
Gold, a very independent and highly respected Canadian academic at McGill who
is Canada’s leading patent law professor and scholar, has just published an encouraging
op-ed in the Globe and Mail an April 6, 2017
in which he concludes:

The win over Eli Lilly
only opens the door of possibility. It provides us freedom to do what we need
to do to have a sustainable innovation policy and bring wealth and wellbeing to
Canadians. Now, we face the hard part: What we do with that freedom.

The good news is that
we no longer need to worry that trade tribunals will become supranational
courts of appeal over domestic property law disputes.

As
will be seen below, Robert Howse is more pessimistic and I tend to agree with
him.

Why I am Less Enthusiastic

In
my respectful view, Canada gambled and won an important victory in an arguably avoidable
and unnecessary battle in this instance, but it is far from clear that that the
ISDS wars are over. Canadian political and judicial sovereignty remain
seriously at risk.

In the ISDS proceeding, Canada chose to acknowledge
that “a State is responsible in international law for the conduct of its
organs, including the judiciary”. (paras 175 and 186) and argued that “the only
substantive obligation under NAFTA Chapter Eleven with respect to judicial
measures is to ensure that the investments of an investor from another NAFTA
Party are not denied justice. As Claimant has not claimed a denial of justice,
the Tribunal need make no further inquiries.” (footnotes omitted, para
186).

Basically,
this means that unless there is proof of corruption or bias or other extremely
serious denial of justice, the decisions of the judiciary should not be
reviewable under ISDS. Since one cannot even imagine that there would be such a
denial of justice in Canada and it was not alleged, that should have been the
end of the matter.

However, Canada did not raise this as a preliminary
jurisdictional challenge. As I have previously noted and questioned, Canada chose not to have this challenge
dismissed initially on purely jurisdictional grounds, namely that the NAFTA
ISDS mechanism does not permit a foreign investor to bypass or appeal from
domestic courts – except in the obviously inapplicable circumstance in Canada of
denial of natural justice such as a result of corruption or bias. One would
have thought that there was little risk in such a challenge and that it had a
good chance of success – and it turns out that that one would probably have
been right. Australia resisted an ISDS challenge of its tobacco plain packaging
by Phillip Morris on technical jurisdictional grounds and prevailed. Would a normal defendant refrain from
relying on a jurisdictional defence - such as being dragged into the wrong
court or a limitation period – in order to take the high road and have a
civilized debate on the merits?

Canada argued that

“…that domestic courts are to be afforded substantial deference,
and that NAFTA tribunals cannot “second-guess the reasoned decisions of the
highest courts of a State”. Respondent relies upon the finding of the Mondev tribunal that even if a
domestic court were to elaborate a new interpretation of the law, as Claimant
alleges in this case, this is not unexpected in a common law jurisdiction. In the absence of a denial of
justice, there would be no violation of Article 1105.” (footnotes omitted) (para 198) (highlight added)

With respect, this is much too polite.
“Deference” is a concept that applies when higher courts review findings of
fact, discretionary rulings, etc. of lower courts or tribunals. The concept of
“deference” implicitly, if not explicitly, concedes that there is jurisdiction
but that the higher court will defer to the lower in certain respects. There
should be absolutely no jurisdiction for a NAFTA tribunal to review domestic
Canadian courts absent evidence of denial of justice. This should not be about
deference. It’s about simple and total lack of jurisdiction in the absence of a
“denial of justice”.

Instead,
Canada chose to take an arguably and unnecessarily dangerous high road and to
let this line of argument blend in with the enormously complicated and
expensive resolution on the merits. Not
only was this risky because Canada might have lost on the merits and lost half
a billion US dollars and set a dreadful precedent. It dignified what should have been a clearly
inapplicable process required spending about $CDN 6.5 million of taxpayers’
money – most of which was the time of civil service lawyers calculated at well
below private sector rates. Of this amount.
Canada spent almost US $1.4 million on an outside law firm and several
experts, including professors making six figure amounts. Canada will only be
reimbursed for 75% of its costs of legal representation and assistance – in the
amount of CAD $4,448,625.32. There is no explicit explanation for this
shortfall of almost $CDN 2 million – despite Canada’s overall success and very
discounted rates for its public servants’ time.

Canada
predictably won on the “merits” of this dispute. This was hardly surprising.
Canada’s case law on the promise doctrine and utility has evolved rationally
and coherently over many years and through numerous Federal Court, Federal
Court of Appeal and Supreme Court cases since the SCC Consolboarddecision
of 1981.

The Tribunal stated:

423. Furthermore, the Tribunal finds that
Respondent has asserted a legitimate public policy justification for the
promise doctrine. In particular, Respondent has explained that enforcing
promises contained in the disclosure helps ensure that “the public receives its
end of the patent bargain” (particularly but not solely in connection with “new
use” and “selection” patents) and that it “encourages accuracy while discouraging
overstatement in patent disclosures”. The Tribunal need not opine on whether
the promise doctrine is the only, or the best, means of achieving these
objectives. The relevant point is that, in the Tribunal’s view, the promise
doctrine is rationally connected to these legitimate policy goals. [footnote
omitted]

By way of conclusion, the Tribunal
stated that:

442. For the above
reasons, the Tribunal holds that even if it were to accept Claimant’s position regarding
the legal standards applicable to its allegations of arbitrariness and

discrimination,
Claimant has failed to establish the factual premise on which its allegations of
arbitrariness and discrimination are based. The Tribunal has already concluded
that there was no
fundamental or dramatic change in Canadian patent law. In the
circumstances presented in these proceedings, the evolution of the Canadian
legal framework relating to Claimant’s patents cannot sustain a claim of
arbitrariness or discrimination going to a violation of NAFTA Articles 1105(1)
or 1110(1).

(highlight added)

What did Canada achieve
with this arguably needless roll of the dice? Here’s my summary, which is
explained a bit more below:

Canada spent about $6.5 million on this case
but only recovered about $4.5 million in costs

The Tribunal ruled that “It is not the task
of a NAFTA Chapter Eleven tribunal to review the findings of national courts
and considerable deference
is to be accorded to the conduct and decisions of such courts.” The door is
still open to challenges of Canadian judicial decisions “in very exceptional
circumstances, in which there is clear evidence of egregious and shocking
conduct” (para. 224)

It is still open to challenge Canadian judicial
decisions, since the Tribunal ruled that in each case, it “will be a matter for careful
assessment in any given case, subject to the controlling appreciation that a
NAFTA Chapter Eleven tribunal is not an appellate tier with a mandate to review
the decisions of the national judiciary.”

The
Tribunal stated that the Tribunal it was “unwilling to shut the door to the possibility that judicial
conduct characterized other than as a denial of justice may engage a
respondent’s obligations under NAFTA Article 1105.” (para 223) (highlight added)

A
“fundamental or dramatic change” in Canadian IP law as determined by the
Canadian courts may still open the door to another challenge. Guess what? There
is sometimes “fundamental or dramatic change” in legislation or judicial
interpretation. That should not be any
basis for an ISDS challenge. That’s why we have legislatures and an exemplary
judicial system by any measure.

What Could be Next?

Accordingly,
I believe that there could be news ISDS challenges that may slip through the
door that the Tribunal is “unwilling to shut” based on these exceptions. Canada
may be forced to defend these challenges at huge cost and risk. For example, there
is a well-financed lobby of copyright content owners who believe that Canada
has lost its way on copyright fair dealing, and who tried unsuccessfully to
roll back the CCH v. LSUC decision. While their time may have run out on that
and the 2012 amendments, they may be waiting for the next opportunity. We have
also seen some blatant and histrionic attacks in recent years on the Copyright
Board, including the “renegade” comment from former head of the Canadian Association
of Broadcasters in 2005 and the shameful attempt by Music Canadain
2015 to lobby the new Chair, telling him in an astroturf campaign that:

This [Re:Sound Tariff 8] decision discards years of agreements freely
negotiated between digital music service providers and the music industry and
sends a message to the world that it does not value music as a
profession. This is inconsistent with Canadian values.

These rates
were unprecedented globally – they are one of the world’s worst royalty rates
for non-interactive and semi-interactive music streaming.

That
Copyright Board decision is now the subject of judicial review in the Federal
Court of Appeal. Interestingly, this seemingly straightforward case has been
pending after the hearing in February of 2016 for more than 14 months which is
very unusual for a Court that normally hands down decisions in a few weeks or
six months at the most. If this case turns out badly for the American record
industry as represented by Music Canada, and the SCC either refuses leave to
appeal or rejects an appeal, don’t be surprised if there is a NAFTA challenge –
assuming we still have an NAFTA with ISDS provisions.

“Although
the Alberta Education case is one of the most egregious examples, it is not in that case alone
that the SCC has taken IP
jurisprudence down a crooked path.”

(highlight added)

It’s
an interesting coincidence that he uses the word “egregious”, which is the same
word used by the NAFTA Tribunal to justify its refusal to “shut the door” to
review of decisions of the SCC. What can be said about the “crooked path”
comment, other than it is more or less contemporaneous with the “crooked
Hillary” rhetoric was head before last year’s American election?

His commentary for MLI, which is referred to in the above
postings, reads more like a lobbying brief for the publishing industry than any
kind of careful analysis. He states:

How Heritage
responds to the pressing needs of the educational publishing industry, and the egregiously bad state of
copyright law affecting it, will be a real measure of its efficacy. (highlight
added)

Words
can matter. I don’t know the circumstances of how or why Richard wrote the
above stuff. But if this commentary does reflect the view of Canada’s
educational publishers, many of whom have foreign parents, we may be facing a
NAFTA challenge based upon what Mr. Owens and some of his colleagues may consider
to be “egregious” future decisions of our Copyright Board and Courts.
Mercifully, any NAFTA claims based upon the 2012 legislation or the 2012 SCC
rulings are now time barred. But we are still awaiting first instance decisions
on fair dealing from the Federal Court in the Access Copyright v. YorkUniversity
litigation and from the Copyright Board in the Access Copyright Post-Secondary
tariff hearing.

I
only hope we are not getting into “alternative fact” and “alternative” legal
territory Such provocations on the part of various copyright stakeholders and
intemperate and even histrionic commentary are potentially worrisome in view of
the Tribunal’s refusal to “shut the door” on challenges to domestic courts if
somebody thinks and can afford to assert that our courts or legislature has
made “fundamental or dramatic” change
to Canadian IP law. Sometimes, such change is required.

Indeed,
if and when Canada enacts plain packaging requirements for tobacco, that
industry will no doubt deploy every legal tool available to fight back. A few –
or even several - million dollars for an ISDS challenge is small pocket change
for this industry. Any delay in such measures or any lessening of their
efficacy resulting from the chill effect of an ISDS challenge is money well
spent as far as big tobacco is concerned. It seems abundantly clear that big tobacco will challenge any
Canadian effort to implement plain packaging.

It
may be noted that Phillip Morris International reported net revenues of $US
74.953 billion and net earnings of $US 6.967 billion in its annual report for 2016, which is replete with references
to “plain packaging” and notes that Canada is “considering adopting plain packaging
legislation”.

The
new cannabis legislation, Bill C-45, includes plain
packaging, trademark and copyright
related provisions that may well generate litigation focusing on
“expropriation” of trade-mark rights and freedom of expression. Who knows if
there are foreign investors waiting in the wings ready to light up an ISDS
challenge?

Can Canada Afford ISDS?

ISDS, of course, is one of
the main contributing factors to the controversy over CETA, the BREXIT crisis
and the demise of the TPP. Hopefully, in any NAFTA renegotiation, Canada will
be able to either get rid of ISDS or put in safeguards to ensure that nothing
like the Eli Lilly case can ever happen again.

It has never been clear why
the Canada thought that ISDS in NAFTA was a good idea, and it has certainly not
worked to Canada’s advantage. A study published by the CCPA in 2015 documented:

“…. the 77 known NAFTA investor-state dispute
settlement (ISDS) claims up to January 1 2015. These include 35 against Canada,
20 against the U.S., and 22 against Mexico. Canada has paid out NAFTA damages
totaling over $CAD172 million, while Mexico has paid damages of $US204 million.
The U.S. has yet to lose a
NAFTA chapter 11 case. All three governments have incurred tens of
millions of dollars in legal costs to defend themselves against investor
claims.”

(highlight added)

For
those cynical types who look to the “school of legal realism” now and then to
explain things, it might be noted that ISDS cases can be very lucrative for
those involved. The ISDS community is small and rather closed. It is a very
lucrative niche for some retired judges, certain academics and practitioners
who are arbitrators – and for the experts involved, especially if there is
repeat business. This an area of practice that will not likely go gently into
any good night. There may even be some who aspire get into this small ISDS
circle and may be reluctant to criticize it, even though they know its
shortcomings.

Some
Canadian experts made substantial six figure amounts in this case. A Canadian
professor from UNB, who was an expert witness for Eli Lilly was paid US $213,692.
A Toronto lawyer, who was an expert witness for the Canadian Government, was
paid more than CDN $492,000 – far more even than any of the arbitrators. Much,
if not all, of this “expert” testimony would have almost certainly been
inadmissible in any domestic Canadian judicial proceedings insofar as it dealt
with Canadian law. There were also expensive expert reports about foreign and
treaty law. Foreign law is normally irrelevant and wouldn’t be considered by a
Canadian court – unless there is a void of applicable Canadian jurisprudence or
the Canadian statute is somehow ambiguous and requires reference to a treaty,
which was not the case here.

The
three arbitrators, none of whom were Canadian and all of whom are clearly very
well qualified, made US $259,734.75, $114, 359.20 and $138,872.07. Ironically,
several of the “experts” made more than two of arbitrators and one made more
than the Chair of the Tribunal, who presumably held the pen in writing the
judgment. NAFTA arbitrators get paid US $3,000 per day, which may not seem to
be a lot per diem compared to some
routine commercial arbitration cases – but these NAFTA cases take a lot of time
and the community of arbitrators is said to be rather small.

Eli
Lilly spent over $US 8,000,0000 for legal fees and disbursement – mostly to a
US law firm and $US 1.3 million on experts, arbitration costs and fees. Their
Canadian firm, Gowlings, was paid US $1,577,017.

More
detail, including names and amounts, are set out near the end of the award.

The
costs of the many Canadian public service lawyers in the Trade Law Bureau who
worked on this case were hourly billed at “hourly rates that are substantially
lower than those charged in the private sector.” (FN 622 of award).

It
may be noted that Eli Lilly USA reported revenue of US $21.2 billion and net
income of US $2.7 billion for 2016 and did not even mention the NAFTA case in
its 2016 annual report.

So, this is where we appear to stand:

This
decision may not stop the next pharma, tobacco, copyright or whatever other ill-considered
case from proceeding – at great cost and risk to Canada and pocket change costs
to the claimants, who may predictably lose but foment sufficient expense,
consternation, controversy and regulatory chill in the meantime to justify the
relatively costs in terms of their rent driven revenues. Delay and indecision
by Government can be very profitable for certain industries. Do not count on
any ISDS tribunal readily declining jurisdiction.

So, what is the real message of the Eli Lilly tribunal? They are not
coming out and saying it, but, by implication, they encouraging future
regulatory takings claims by implication that the concept of
"expropriation" under NAFTA might
well apply to require a host state compensate an investor even for jurisprudential
shifts in the approach of a country's highest courts to that country's law
(including its constitution), if that
shift can be characterized as dramatic, radical, or fundamental. It is a matter
of the Eli Lilly legal team simply not doing a good enough job proving that the
jurisprudential developments in question were dramatic.

When high courts reconsider well established
judicial doctrines in the face of social, economic, environmental or other
forms of rapid change we experience in the world today they must now beware
that any basic or fundamental reorientation of their jurisprudence could force
the government of that state to pay out millions or billions to foreign
corporations in the guise of an "expropriation" having occurred.
Regulatory chill from ISDS is bad enough; but when it comes in a form that
makes a nation's highest court choose between its duty as a guardian of the
state's legal system (including the revision or reversal of important rulings
for compelling reasons) and incurring the state's liability to foreign
corporations, the attack is not only on domestic policy space as such but also
on the judiciary as the guardian of the law.

Now Back to the
Supreme Court of Canada

Of course, all eyes now shift back to the SCC, where the AstraZeneca case was heard on November 8, 2017, with
materials available here. The webcast
of that hearing is available here. It is well worth watching and seeing so
many SCC judges so engaged in the intricacies of patent law and asking so many
questions. Highest courts are normally very reluctant to get involved in patent
cases, which usually turn more on evidence and fact finding than major legal
issues.

I posted at length about this case the day before the
hearing – and the NAFTA “rogue elephant lurking nearby and possibly even in in
the room that I expect will remain almost completely silent and will likely be
carefully ignored.”

One never knows exactly why the SCC decides to hear a case
or not. As we all know, it decided early in 2013 not to hear about the “promise
doctrine” in the Eli Lilly case. It will be recalled that the Eli Lilly NAFTA
challenge was commenced on September 12, 2013. Not long thereafter, leave to
appeal in was granted in the Sanofi case on January 30, 2014, where the
“promise doctrine” was in issue. The Court was all dressed up and ready to go
on the actual hearing on November 4, 2014– but the case was dramatically and
very unusually settled literally on the eve of the hearing, which may have left
the justices and interveners somewhat frustrated. I wrote about this at the time.

In the AstraZeneca case, the Appellant, AstraZeneca made the
Court aware on the record in the leave to appeal material and its factum of the
Eli Lilly NAFTA challenge. Whether this challenge played any role in the
Court’s decision to hear the case is something we may never know. However, it
is interesting that the Court has agreed twice since the initial refusal to
grant leave in the Eli Lilly case to hear about the “promise doctrine”. Both of
these leaves were granted after the Eli Lilly NAFTA challenge was launched.

If the SCC had any intention of ruling in advance of the
NAFTA tribunal, it is now, of course, too late. A strong ruling either way
might have been of interest to the NAFTA tribunal, which might have had to hear
further submissions. But that has not happened.

Indeed, counsel for the respondent in the AstraZeneca case on March 22, 2017 has made the Court aware of the Eli Lilly NAFTA ruling
as a “supplementary authority”.
There has apparently been no response. My guess is that the Court will
not react to the NAFTA ruling one way or the other, unless by way of obiter dicta, which could be very
interesting. The whole point is that Canada’s SCC should have the final word on
the application and interpretation of Canadian law and a NAFTA Tribunal has no
jurisdictional basis to “second-guess” the decision of any Canadian court, much
less the SCC (other than in a “denial of justice” case, which is unthinkable in
Canada). So, the SCC has no compelling reason to be interested in anything
coming from a NAFTA tribunal.

That said, it would now be ironic if the SCC were to undo a
long line of Canadian case law on the “promise doctrine” and to effectively, in
its forthcoming AstraZeneca ruling, vindicate Eli Lilly’s position in its
unsuccessful NAFTA case and the appeal it declined to hear in 2013. Tempting as it may be, I will refrain from predicting
the outcome. As Yogi Berra said, “It's tough to make predictions,
especially about the future'”. In this
instance, one might say that it’s especially tough to make a “sound
prediction.”